Small loans spark big concerns as stress levels rise

A remarkable shift has unfolded in the world of banking over the past decade in India, and it’s not what you might expect.

- Shayan Ghosh

This time, it’s not the mega loans to corporate giants that are making bankers nervous. The latest cause for concern is much smaller in scale: Consumer loans, each less than ₹50,000. These loans have reshaped the risk landscape, leaving lenders and investors on the edge.

Although corporate non-performing assets (NPAs) have shrunk over the years as chunky bad loans have been resolved, the attention of both lenders and investors has shifted to concerns surrounding small-ticket loans.

After burning their fingers over corporate toxic assets, banks transitioned to retail loans over the years and, more recently, unsecured personal loans. However, as they see emerging stress in smaller loans, a clutch of large banks and non-banks has decided to exercise caution when lending to this category of borrowers.

To be sure, this bucket of small-ticket personal loans comprises 2% of all personal loans, according to TransUnion Cibil. Total personal loans or “other personal loans" as classified by the Reserve Bank of India (RBI) stood at ₹12.2 trillion as of August, up 26% from a year ago. These unsecured loans include credit for domestic consumption, medical expenses, travel, marriage and other social ceremonies and loans to repay debt, among other things.